Solar Power: Sunshine's Cloudy Days

By Mark HalperFriday, Jan. 22, 2010

C3727 XAMAX / DPA / Corbis

Mike Ahearn, chairman of the world's largest manufacturer of solar panels, had every reason to party in September. That's when his company, First Solar, based in Tempe, Ariz., was picked by China to build what promises to be the world's biggest solar-electricity plant: a Manhattan-size facility in Inner Mongolia providing 2 gigawatts of power, about twice the size of a large coal plant or average nuclear power station. But the Chinese facility will take years to build, and the party buzz subsided pretty quickly. The next month, Wall Street analysts downgraded First Solar's stock after the company missed its third-quarter revenue target. "I think the Wall Street perspective is pretty short-term," says Ahearn.

That's true, but it's also true that, while photovoltaic cells that turn sunlight into electricity may play a potentially vital role in weaning the world from fossil fuels, a transition will take decades  and the business metrics surrounding the solar-power industry currently are anything but bright. After a period of rapid expansion, panel manufacturers today are reeling from a pronounced supply surplus, falling prices and stagnating sales. In 2009, industry revenue plunged by nearly 40% to about $25 billion from $40 billion the previous year, according to BankAmerica Merrill Lynch alternative-energy analyst Steven Milunovich. Solar-panel output far outstripped demand last year; manufacturers made 66% more product than they were able to sell, estimates research firm iSuppli located in El Segundo, Calif. Some analysts believe the dismal conditions will persist into 2011, setting up marginal players worldwide for failure. "A large number of manufacturers will not survive," says Paul Semenza, an analyst with research company DisplaySearch, based in San Jose, Calif.

The global glut has been building for a number of years as hundreds of solar cell and panel start-ups, attracted by a potential boom in alternative energy as oil prices climbed and by government solar-energy-subsidy programs, swarmed into the market. Because the industry's barriers to entry are relatively low  crystalline solar cells are rudimentary semiconductors that are comparatively easy to make  the number of solar-panel and photovoltaic suppliers mushroomed nearly tenfold from 2002, when there were about 80 manufacturers, to somewhere between 500 and 800 today, according to iSuppli. In China and Taiwan, whole solar-energy sectors sprouted almost overnight. Stefan de Haan, an analyst for iSuppli, says industry profit margins, as high as 40% in 2008, have been devastated as a result, falling close to zero last year for many companies. "Everyone wanted 20% market share," says de Haan. "Oversupply was the consequence."

This burst in manufacturing capacity would have been tough to absorb even in the best of times, but the global recession has compounded the industry's growing pains as cash-starved customers shelved ambitious solar power plans. Another blow came early last year when Spain changed the way it subsidizes solar power projects. The country had been the world's biggest backer of "feed-in tariffs" that encourage the spread of green technology by requiring utilities to pay prices well above the commercial electricity rate for power generated by the sun. But a year ago, Spain slashed the amount of solar electricity eligible for such rates by about 80%, slamming manufacturers who had ramped up for Spanish growth. In 2008 the country accounted for 2,600 megawatts of the world's 5,362 megawatts of solar-electricity installations; last year it eked out 300 megawatts, according to iSuppli.

Spain's decline leaves Germany as the world's top market for solar electricity. Germany last year installed about 2,500 megawatts out of the world's 5,158. But the country is hardly a safe haven from the fierce price warfare that has broken out as too many companies compete for too few customers. Prices for the most common solar modules have fallen from $4 per watt to $2.20 per watt, according to de Haan. Germany's Q-Cells, the world's fourth largest maker of photovoltaic cells, lost $1.4 billion through September, including the cost of axing 500 jobs in August. Another prominent vendor, German solar cell and module maker Conergy, lost $115.6 million through the nine months ending Sept. 30. The price war is even heightening trade tensions with China, home to roughly half of all solar manufacturers (four of the top 10 panel makers are Chinese, including No. 2 Suntech, according to iSuppli). In September, German solar-industry association Bundesverband Solarwirtschaft began investigating whether Chinese producers are dumping products.

The industry's current woes go beyond intramural competition. Although the commercial solar-cell business dates back almost 50 years, solar panels still cannot compete with fossil fuels when it comes to generating electricity relatively cheaply. Even during periods of high oil prices, government subsidies are needed to encourage consumers and companies to install solar power, exposing the sector to sharp contractions when support is dramatically reduced, as happened in Spain in 2009 and could happen in Germany later this year.

Yet solar-panel companies are increasingly optimistic that, with technological advances and improvements in manufacturing efficiency, it won't be too long before "grid parity"  the point at which solar power is equal to or cheaper than conventional energy sources  is reached, especially if oil prices remain high. Manufacturers of the common crystalline variety of solar cells continuously leap-frog each other with claims of improving their product's efficiency (measured by the percentage of solar energy put into a cell that emerges as electricity). Last month, Norway's REC, together with Dutch research institute ECN, unveiled a 17%-efficient solar module, trumping Suntech, which a few months earlier had hailed its creation of a 16.5%-efficient module. Other manufacturers, like First Solar, are improving on a type of solar-cell technology known as "thin film," in which an energy-generating substance  usually a compound called cadmium telluride  is layered onto a glass, plastic or steel substrate. Thin-film cells are generally less energy-efficient than the crystalline variety but are potentially much cheaper to manufacture. If the technology continues to improve, solar power could achieve parity within five to 10 years, says Peter Thiele, executive vice president of Sharp's energy-solutions division in Europe.

Or even sooner, if panel prices continue to fall while oil prices rise. Observers say sales growth is rebounding as buyers respond to increasingly cost-effective solar power. Venture capital is starting to flow to the industry again after a severe slowdown, according to San Francisco research firm Cleantech Group. "Yes, we've seen major market disruptions, but [panel] price decreases are driving rapid growth across many markets," says Chris Porter, a consultant with Boston-based Photon Consulting. Industry leader First Solar's profits for the third quarter actually increased to $153 million from $99 million in the same quarter a year earlier, despite missing its targets. First Solar CEO Rob Gillette said last month that demand in 2010 would be "less volatile and more predictable." The company is even planning to add assembly lines in 2010 in order to boost its output of thin-film products.

First Solar, however, could be in the minority. Analysts aren't expecting a recurrence of the recent boom years any time soon. Weaker players will likely disappear or merge with stronger rivals in the coming year, they say. For the survivors, this will be a good thing  they'll start to recover some of the pricing power lost to overcapacity, and as the industry consolidates, fewer but larger manufacturers will begin to enjoy greater economies of scale, which should help profit margins. "It's really all about scale now," says Reyad Fezzani, CEO of BP Solar. Maybe the sun will come out tomorrow  but it might be unwise to bet your bottom dollar on solar power just yet.